Bank of England leaves key interest rate at 5.25 percent

The Bank of England left its key interest rate unchanged on Thursday for the sixth straight meeting, but signaled that it may start easing policy as early as next month, as inflation pressures ease.

“We’ve had encouraging news on inflation and we think it will fall close to our 2 percent target in the next couple of months,” Governor Andrew Bailey said in a statement accompanying the Monetary Policy Committee’s decision, adding that he was “optimistic that things are moving in the right direction.”

However, he added that “we need to see more evidence that inflation will stay low before we can cut interest rates.”

The Bank’s Monetary Policy Committee (MPC) voted 7-2 in favor of holding the Bank Rate at 5.25 percent, but the shift toward easing policy was apparent, with Deputy Governor Dave Ramsden joining Swati Dhingra in voting for an immediate quarter-point cut.

The Bank said it now sees growth slightly higher, and inflation a little lower, over the next couple of years, owing to a slight upward revision to its assumptions on population growth, and also due to measures taken in this year’s budget. One of the MPC’s key judgments at its meeting was that inflation pressures would ease by slightly more than previously expected.

At his press conference, Bailey noted that the Bank will get two sets of wage and inflation data before its next rates decision on June 20, which may give it the confidence to start easing policy. However, he warned that “a rate cut in June is neither ruled out nor a fait accompli.”

In sync with ECB

A first move in June would have the Bank moving more or less in sync with the European Central Bank, which has guided more explicitly for a first cut then. It would also imply that both banks start cutting rates well before the U.S. Federal Reserve, exposing the pound and the euro to possible pressure in the foreign exchange markets.

Bailey, however, swatted away such concerns, saying that “there is no law that says the Fed moves first,” and adding: “Our inflation dynamics are different.”

After an initial dip against the dollar on the news, sterling recovered all of its losses and more to trade at just under $1.25 by early afternoon in London — effectively unchanged on the day.

U.K. stocks, which have started to come back into favor with international investors in recent weeks, reacted more enthusiastically to the prospect of imminent rate cuts (interest rate futures imply a high chance of three quarter-point cuts by year-end). The FTSE 100 index rose another 0.2 percent to a new all-time high.

“We wouldn’t completely rule out a June move if the upcoming data suggest inflationary pressures are less persistent than the Bank expects,” Fitch Ratings’ Jessica Hinds said in emailed comments. “But the stickiness of wage and services inflation means we think that the MPC will hold off until August.”

Services inflation, in particular, has been a bugbear for the Bank in recent months, and is still running at 6 percent. Given its strong connection to wage growth (which remains above the Bank’s comfort zone) and its relatively loose one to external factors, many on the MPC have repeatedly warned about its ability to keep overall inflation above target.

The decision comes at a time when inflation is running at 3.2 percent, its lowest in two and a half years. It will almost certainly fall further in April and May, reflecting the 12 percent cut in energy regulator Ofgem’s price cap for typical household bills, which took effect last month.

The Bank expects this to bring inflation down to its medium-term target of 2 percent but its new forecasts show it rebounding to around 2.5 percent later this year as various effects from a year ago pass out of the calculations. This rebound, it said, “reveals the persistence of domestic inflationary pressures.”

The decision also comes a day ahead of preliminary data that are expected to confirm that the U.K. economy grew for the first time in a year in the first quarter of 2024, emerging from a shallow recession over the second half of 2023. The Bank expects gross domestic product to have grown by 0.4 percent through March.